NowVertical Group Inc. (NOW) Q3 2022 Earnings Call Transcript

NowVertical Group Inc. ( ?????? : NOW) Q3 2022 earnings call dated Nov. 17, 2022

Corporate Participants:

Glen Nelson — Vice-President, Investor Relations and Communications

Daren Trousdell — Chairman and Chief Executive Officer

Presentation:

Glen Nelson — Vice-President, Investor Relations and Communications

Good morning, everyone. Pleased you could join us today for NowVertical’s Third Quarter 2022 webinars. I’m Glen Nelson, Vice-President, Investor Relations and Communications. With us today, we have Daren Trousdell, Chairman and CEO of NowVertical Group. The webinar today will begin with some opening comments from Daren and our recent company developments and results. After Daren’s prepared remarks, we’ll take some questions from you.

I’d like to also remind you that our remarks today will include some forward-looking statements and are subject to important risks and uncertainties. They may refer to certain non-GAAP or segment measures, such as adjusted revenue, pro-forma adjusted revenue and adjusted EBITDA. These measures do not have any standardized meanings under IFRS. And as a result, they may not be comparable to similar measures presented by other companies. For more information on those, please look at our reports we filed on SEDAR. I’d also remind you that a replay of the webinar will be available on our website later today. And with that, I will turn it over to Daren.

Daren Trousdell — Chairman and Chief Executive Officer

Good morning, everyone. Thank you for coming to our webinar. Very excited to spend time with everyone today, sharing our results from our Q3 that we posted last night. Very, very exciting to see the momentum continue. It still feels like the earliest days, first innings for our story. So today, I’m going to spend a little time sharing this information and answer a few questions at the end and we’ll go from there.

So just kind of for everyone’s benefit NowVertical Group, stock symbol is Now on the TSXV. We are a vertical intelligence software and solutions company that’s growing our business, building our business through both organic and inorganic means through targeted acquisitions. Our company is comprised of a network of big data, AI technologies led by industry experts. We provide solutions for our customers that are organized by industry that help our customers reveal, secure and mobilize their data. And that in the delivery sense covers data governance, data security, process automation and predictive and prescriptive data analytics.

Ultimately, what we’re doing is helping our C-Suite customers and government official customers across seven core verticals focus on what matters, and that includes eradicating the risk with their data, removing roadblocks so that they can become more efficient as organizations and ultimately cutting costs and in this macro-environment is a very important part of the process and we are helping customers accomplish all three with our solutions, ultimately in an effort so they can have the confidence to make bold decisions that are data-backed.

We’ve had an incredible run-in a very-very short amount of time. We went public July 5th of 2021. We’ve acquired nine companies, built seven core verticals that we focus on. There are now 200 plus customers. Our pro forma TTM revenue is $33 million from very little only over a year-ago. So we’re moving rapidly on the revenue side of things. The company is now 350 plus people globally. So we are building something that is at scale, that has meaning in the marketplace, that are solving real customer problems that help us stay resilient in any macro-environment.

We serve some of the best customers on earth in our core seven verticals: in government, that includes U.S. government customers like the Department of Defense, Department of Energy; in media, we cover Universal Music, Twitter, Netflix, Amazon Prime; energy, Suncor Energy, Chevron; and in financial services, great clients like Lloyds Bank, First National Bank of South Africa; and in other parts of the enterprise sphere Disney Palo Alto Networks, Adobe and many more.

We have fantastic momentum happening right now on the financial side of our business going 800% revenue growth from the comparable period a year-ago we delivered adjusted revenue of $8.5 million. In from the previous quarter of $7.7 million, we are rapidly starting to scale our business up on the revenue front.

What’s really exciting for us and something we’re extremely proud to share is our Q3 had a small adjusted EBITDA loss close to neutral. Our Q4, we are working hard to deliver a positive adjusted EBITDA for our group. Into ’23, making this a positive adjusted EBITDA story is very-very important to what we’re doing in our financial profile. So we are on the doorstep of this now after a lot of work, a lot of the factors coming together, integrating acquisitions. We’re finally being able to showcase those in our financials and we’re really excited about that.

Ultimately these acquisitions when you stack them up through the time that we acquired them, in aggregate, are giving us much more than 10 times plus annual growth. We think there is going to be significant growth to continue even in a tough economic climate, we see baseline growth around 20% for our group even on an individual unit basis which is going to aggregate into a nice kind of growth picture. When other companies are going to struggle to grow, we are still going to have growth, which we’re excited about.

And we’re going to exit the year at a $40 million pro-forma U.S. run-rate from very little, like I said a year-ago so the revenue is starting to get to a point where the business has real scale potential. We have not come off of our ultimate goal. We have a goal of getting to a $100 million top line. So we have additional acquisitions in-flight. We’re always doing on the M&A front, we’ve shared previously that we have three LOI’s underway. So we’re working hard to close those in this quarter. That’ll help bring our revenue closer to a $100 million and then additional M&A plus the organic growth will get us there, we believe, as soon as early Q1. So that’s what we’re ultimately working on and that’s the goal. From there, we will share new goals and new guidance with everybody at that point once we get through this first macro go, which in our 20 plus — just over 21 total history is going to be a significant achievement for us to get to that level of revenue scale at the size of company we are in as fast as we’re moving.

So all-in all, excellent quarter, very proud of our team, proud of our partners, proud of our customers, proud of our shareholders. 800% plus growth from the comparable period. Our gross profit is growing in totality, and we’re now on the doorstep of positive adjusted EBITDA, which will transform our story for the long-term we believe. So some catalysts to look-forward to, just to recap: more M&A, organic growth within our group, which will include baseline 20% and cross-selling opportunities between our units now that we’ll be talking a lot about next year. And then we’re also — we have some other projects on the way, whether it’d be U.S. Better access for people to buy our stock in the U.S. and some other work we’re doing in the capital markets front on uplisting the company next year at some point that would make sense for us to expand the story and make it more accessible to a larger pool of investors and shareholders.

So that concludes the presentation. From there I think we should answer some questions, Glen.

Questions and Answers:

Glen Nelson — Vice-President, Investor Relations and Communications

Yes. Thank you, Daren. You can find the Q&A button on the on the bottom banner of your Zoom window here. Feel free-to ask your question, then we’ll get to answering it.

Okay, so we have a question here from Rob Goff at Echelon.

Can you please talk about the progress that you’re having with your integrations?

Daren Trousdell — Chairman and Chief Executive Officer

So we are doing very well on our integrations. A few projects that we’ve been delivering through the year that now are becoming a big part of our overall M&A playbook. One is back office systems, first thing, that we are implementing for our group. We have procured NetSuite for our company, which is our kind of back-office accounting system. We are putting NetSuite into all of our operating units. That helps with speed and timely reporting that we can aggregate and consolidate our financials every months. So that’s a really big kind of first step. From there, banking and other back-office steps, so that we can ensure that we can leverage any of our operating unit cash, bring the parent etc. So those functions help kind of give us visibility reporting and control of our operating units. From there, we look at any overlapping kind of roles or overlapping costs that we’re looking to find synergies there. So we do a lot of work there. We’ve been doing stuff to improve the margin profile and that’s a big opportunity for us to optimize our margins that will continue.

And then the next big project for us on integration that you’ll see is brand. We want to rally and go-to-market around the Now brand. So you’re going to see our operating units start to map quickly to the Now brand versus their historical end-market brands. So those are the core projects on M&A.

Glen Nelson — Vice-President, Investor Relations and Communications

This question is from Hernan Gomez. Can you expand on the type of measures that Now is taking to improve on profitability?

Daren Trousdell — Chairman and Chief Executive Officer

So like I just mentioned on — first things first, on gross margins, improving the cost on our service delivery which lives in our cost-of-goods-sold in the service side, solutions side of our business. Our software business has very strong gross margins, around 75%, 80% roughly give or take. So we’re really working to optimize our solutions delivery margins. So next year, you’ll see those improve.

We really would like to see this get to the 50% gross margin in aggregate for the group. So obviously, the more software assets we add, that helps with that. And the better we optimize our cost-of-goods-sold on the service side, it will help with that. So those are active projects now that you’ll see those improve over-time.

Glen Nelson — Vice-President, Investor Relations and Communications

Next question is from Jesus Sanchez Leon. Can you give us some color about the CFO transitions?

Daren Trousdell — Chairman and Chief Executive Officer

Yes. So Alim Virani was brought in an operational context in the finance department working with, Teri. As we put in the press release, as we’ve kind of shared publicly, we’re building a purpose-built team of people that essentially been there done that and Alim comes from our — in the Canadian market — the best public company success story I’ve seen personally, which is Constellation Software, and that’s been built-in a very similar way to us with a rigid acquisition M&A inorganic playbook. And while at Constellation, Alim was in an operating group, also portfolio manager in the finance side. Brings a capability that we need in here as we accelerate the pace of our M&A and work to get the integration path even more efficient than it is today.

So we felt Alim is a strong leader, a strong operator and Teri and Alim together have really built a world-class finance operation in a short amount of time and Teri handing the reins to a Alim is just a natural progression. And we want to do — we want to make our transitions now because next year is going to be in insanely busy with what we have going on.

Glen Nelson — Vice-President, Investor Relations and Communications

Great. Can you discuss the progress we’re making on the backlog?

Daren Trousdell — Chairman and Chief Executive Officer

So the backlog has hovered around $70-ish million in our government business. We’ve increased that with the recent win with Department of Energy. Line of sight, it’s $80 million now. So we’re growing that slowly but surely. There are some bids in-flight now in our government business that are going to give us the potential to get that to a $100 million in short order, I think in a quarter if we can win those awards. So our happy place in the short-term, call it next two quarters, three quarters is to get that backlog close to a $100 million. And that backlog, for everyone’s understanding, is the way that part of our business works. It’s guarantee contracts that are multiyear, that have a value that we deliver against whatever the parameters are in the contract.

So in the case of our current backlog, that’s getting close to that high 70s, $80 million mark roughly is over a three-year period. So it’s very durable, consistent revenue. And the faster and bigger we grow it, the more durable the overall revenue picture becomes for our group.

Glen Nelson — Vice-President, Investor Relations and Communications

Great. I guess one that’s asked a couple of times here. How are you viewing economic headwinds or how are they affecting the company going-forward?

Daren Trousdell — Chairman and Chief Executive Officer

Yes. Nobody in any industry is immune from the macroeconomic picture. It’s not pretty out here. It’s — commercially from the public markets, private markets, there’s a lot of contraction happening right now, a lot of decision-making. We’re in a unique position with the Now business. And I like to look at it — there is mission-critical technology and service and then there is discretionary technology and services. Discretionary technology and service could be an e-mail platform, things that you don’t have to have to stay compliant or avoid fines or avoid efficient delivery of service in your company. And our customers, as the world gets more challenged, as they are reducing workforce, they need our product and service more than ever because they can become more efficient and cut costs. And some context with that, just our privacy products, which is ultimately helping our customers understand their data state, is helping to reduce overall data storage costs for our customers when — and what’s remarkable, over 60% of our customers’ data we’re finding is redundant waste, data waste that is costing them tons and tons of money.

So just doing these small exercises with our software products are helping to create really significant savings for our customers. So we think our message is resonating well in tough economic times and we resonate well in boom times.

Glen Nelson — Vice-President, Investor Relations and Communications

Great. The next question is from Gabriel Young. And I think you’ve given us a little color on this already. But can you provide some insights around the current pipeline of opportunities both within technology and solutions group? And are you able to quantify some of the larger opportunities and timelines around the potential close of some of these larger deals?

Daren Trousdell — Chairman and Chief Executive Officer

Yes. So there’s two pipelines we run ultimately. We have an M&A pipeline of new companies that we acquire and look to acquire, and that pipeline always in a general sense is sitting $200 million to $400 million of revenue opportunity. In-flight right now and we’ve shared this in previous presentations, there are three acquisitions that we are close to closing on that would represent roughly $30 million, $32 million of revenue, profitable revenue that we would add to our pro-forma USD40 million that will help us exit the year-around $70 million. Those are in-flight close news — things we’re getting close on, so stay-tuned on those.

On the commercial front, we have a very fertile active pipeline. That’s driven by a couple of things. One, we have a very strong external sales channel network that is run by Doug Drummond in our company, who is building a global capability of resellers partner networks that are out there reselling our products, mostly the software side of our business. So we’re seeing a lot of activity come through there, especially on our privacy product and Affinio product that are easier to integrate as a starting point also with the cost-saving message. So we’re seeing an abundance of opportunity there.

On our solutions business we are we’re hitting it out-of-the park. In Latin-America, we keep announcing new customer wins. We just announced an Aeromexico contract. We just keep winning in that market. In the U.K. we keep winning. In U.S. and Canada we keep winning. And we are very bullish on our ability to continue to drive the commercial engine in our group organically, not just inorganically. And the third-part of this, next year, we are going to find a way to share the synergy benefit Now. And the real thesis here is a customer, so if you take one customer we have that’s using our privacy products, so take Lloyds Bank uses our privacy product. That’s all they’re using right now. The opportunity is ultimately to unlock other opportunities in the customers we already have. That will drive our baseline 20% growth much higher and that’s what we’re figuring out for next year and we really think the organic story is going to be as exciting as the inorganic story.

Glen Nelson — Vice-President, Investor Relations and Communications

Right. Kind of a follow-on to that. Can you discuss the organic growth parameters and how we’re kind of looking at organic growth?

Daren Trousdell — Chairman and Chief Executive Officer

Yes, as I just stated, 20% baseline. If we can get the synergies working to what our expectations are, it will be substantially higher than that.

Glen Nelson — Vice-President, Investor Relations and Communications

And from Jesus Sanchez Leon. Given cash position and the interest-rate market that’s out there right now, the share price, how are you looking to approach future funding needs to keep the current growth rate going?

Daren Trousdell — Chairman and Chief Executive Officer

Even in our current interest rates, we have previously in the last two acquisitions used debt strategically and very effectively in our transactions. We are currently are still excited about the debt capability even as interest rates are going up a little bit. It’s still much, much cheaper than using the market, so we don’t intend to go-to-market for every acquisition we have. We’ll stay opportunistic. We have hopes that the capital markets are going to turn to a much better climate sooner than later, hopefully. So we still aren’t seeing debt become too cost-prohibitive for us yet. It’s still very effective. And we’re in — you’ll see news from us in short order on some of those latest and greatest kind of impacts that we’ll see.

Glen Nelson — Vice-President, Investor Relations and Communications

Okay. And next one is from Andre Boto. Just kind of a follow-on to Gabriel’s questions. Can you speak to the nature of the business in the M&A pipelines, add some color to where you’re looking to bring in synergies?

Daren Trousdell — Chairman and Chief Executive Officer

So we’ve been focused a lot this year, going to the end of this year-on our solutions group and getting more capability, obviously, more profitability into our group, positive EBITDA and also geographic coverage. We now have strong, I mean extremely strong operations in Latin America that we are looking to expand. We have strong operations in North America we are looking to expand. We are looking for new markets in Asia and expanding Europe. We’ve done very well in the U.K. already. So the geographic coverage is an important point.

We are excited about software again, because of the macroeconomic environment. We think they’re going to be excellent deals to have in great software companies that are still sub-scale revenue that we can now get into very low-single digit revenue multiples that we can bring into our group and improve their profile and profitability and turn that into a much higher multiple long-term.

So you will see us do both types of deals now versus just solutions group and those software companies are going to quickly help us elevate our gross margin profile to our target.

Glen Nelson — Vice-President, Investor Relations and Communications

Great. Well, I think with that, there’s no further questions. I think we will — we’re clear to wrap-up.

Daren Trousdell — Chairman and Chief Executive Officer

All right. So I just wanted to thank everybody for their time, their support, the great questions, the constant dialog I’m having with everybody. I’m having a blast spending time with shareholders sharing the story, helping people understand what we do. Some of the technology side of this is complicated and not as easy-to-understand. There’s selling a widget. But it’s very-very important work we do. I want to thank our team for incredible delivery in their operating units and their customers. I want to thank our customers for trusting us with their most precious asset, which is their data. And I want everyone to kind of stay upbeat and let’s beat the bears mentality in the market and let’s really push forward in a tough time so that we can all win together. So thank you and have a great day.

Glen Nelson — Vice-President, Investor Relations and Communications

Thank you. And just as a reminder, we will be posting this version of this webinar to our website. Thank you, Daren.

Daren Trousdell — Chairman and Chief Executive Officer

Great day, everyone.